PFI deals should be used 'sparingly', Treasury warns

FINANCE: The government is in danger of wasting £175m on the private finance initiative rebuild at Royal Liverpool University Hospital, the Treasury select committee has warned.

Royal Liverpool and Broadgreen University Hospitals Trust’s plans – which would involve initial capital expenditure of £244m – were singled out for attention in a damning committee report on PFI, which warned the procurement method should be used “as sparingly as possible” until tougher rules were in place.

The MPs found the financial crisis had driven the typical cost of capital for PFI projects to double current rates paid on government borrowing, with “no clear evidence” of advantages to justify the higher costs.

The “inflexibility” of PFI contracts had particular drawbacks for NHS projects, they said, because it meant “any emergent problems or new demands on an asset cannot be efficiently resolved”.

Using Royal Liverpool as an example, they wrote that the expected rate of return for investors over the life of the project was 8.6 per cent. By comparison, the government could secure funding over a similar period for 4.2 per cent.

“If we assume that the outturn costs of construction, maintenance and services will be the same between the PFI and conventional procurement options, the government could have spent £175m less, [in net present value] terms, by borrowing directly from the capital markets, rather than through a [special purpose vehicle] intermediary,” they concluded.

They added: “Based on the analysis presented in this report, we ask the government to give further consideration before proceeding with the procurement in its present form of the Royal Liverpool and Broadgreen Hospital in particular.”

The trust says its current building’s heating, lighting, water and power systems are beyond their 25 year life, while fire guidance has moved on since it was built. It says the rebuild would be cheaper than refurbishment.

Trust chief executive Tony Bell said the PFI business case had been scrutinised and approved by the Treasury and Department of Health.

“We are well advanced with the procurement of the new Royal Liverpool University Hospital, having shortlisted our bidders down to two,” he said.

The committee concluded that “more robust criteria” governing the use of PFI should take precedence over the current financial model for assessing value for money. PFI was “only likely to be suitable where the risks associated with future demand and usage of the asset can be efficiently transferred to the private sector”.

PFI spending should be included in the government departmental expenditure limits, to remove perverse incentives to favour borrowing in this way, they added.

NHS Confederation deputy chief executive David Stout said: “With NHS finances so tight, the committee is right to call for a closer look at how these projects are costed and assessed.

“The task for government is to ensure NHS organisations have better access to affordable capital when they need to replace outdated buildings or develop more efficient services.”

Speaking to the Press Association, an aide to chancellor George Osborne said the coalition was committed to reforming PFI: “We have been saying for a long time that the PFI system we inherited was completely discredited and nothing more than a ploy to keep expensive projects off the balance sheet.”

The longevity of models such as LIFT demonstrate that, done correctly, PPPs offer a flexible and sustainable environment for dynamic services, at a time when GPs are less inclined to buy into career long partnerships. By Chris Whitehouse